Ignore The Scare Headlines; Focus On The Market

After a period of stiff selling in the indexes, which throws the market into a harsh correction, major averages find their footing and eventually flash a buy signal that confirms a new uptrend. Not only that, but new leaders with top fundamentals break out to new highs from sound bases in heavy volume.

But many investors miss the signs because their focus is on negative headlines that paint a weak economy, sluggish corporate earnings and the prospect for higher interest rates. The headlines make you fearful, and fear keeps you out of the market.

It's easy to get jaded in the stock market, especially when negative headlines tend to have the upper hand over positive ones.

It's no surprise that negative headlines are ubiquitous. Study after study has shown that they attract attention. They sell newspapers and magazines, and drive page views at financial Web sites.

But they're rarely helpful to individual investors. In fact, they're detrimental, because negative headlines keep investors away from the start of new bull runs.

Pay too much attention to them, and you'll often miss out on big profit opportunities in the early stages of a new market uptrend.

The stock market headlines were decidedly negative when the U.S. invaded Iraq in March 2003. Geopolitical strife can roil markets, but the S&P 500 did what was least expected on March 17, 2003. It marked a follow-through day on the fourth day of its rally attempt, rising 3.5% in higher volume.

The bullish gain confirmed a new uptrend. From there, the S&P 500 rallied 29% to year-end.

Headlines were also dire in the second half of 2008 and in early 2009, when the financial crisis was in full effect. Credit markets were frozen. Financial and housing stocks were in a world of hurt.

But on March 12, 2009, the S&P 500 surged 4.1% in higher volume on the fifth day of its rally attempt.

And don't forget about the Nasdaq's Day 4 follow-through day on Sept. 1, 2010 (1). (Please see a daily chart.) At the time, headlines harped about the Fed's uncertainty about an economic recovery as well as slowing growth in China.

In all three cases, major averages bottomed when headlines were dire.

Chapter 13 in "How To Make Money In Stocks" is titled "Twenty-One Costly Common Mistakes Investors Make." Number 6 reads: "Not having specific general market rules to tell you... when a market decline is most likely over and a new uptrend is confirmed."

Fear is usually rampant when follow-through days occur. The key is to ignore the scare headlines and focus on what matters the most: price and volume.

(Editor's Note: for additional insight on the market, follow @IBD<SC1,95>KShreve on Twitter.)

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